Thursday, September 18, 2008

Burn Before Reading

Some days, Dear Readers, when the world is crashing down around your ears, your livelihood and net worth is going up in smoke, and your dealer is calling to say he is out of Xanax, it becomes hard to resist the impulse to push back your chair, rub your temples in dismay, and stare uncomprehendingly at the carnage playing out before your eyes.

Today is one of those days.

I have seen one or two others like it.

I remember in the halcyon days of my youth, when but a tender sprout reasonably fresh out of university, I decided to investigate this intriguing business known as "Wall Street" to see what I could find out about it. Naturally, my first impulse was to visit a friend of mine who held gainful employ within the hallowed halls of one of the mysterious practitioners of the financial arts. This ancient and hoary firm went by the since-remaindered name of The First Boston Corporation.

Since my friend worked in equity capital markets at the time, I sauntered through security one fine Monday morning up to the massive, open trading floor where hundreds of salesmen, traders, and support staff performed the various arcane rituals and sacrifices which seemed to be entailed in the institutional equity business. I had seen one or two movies and read one or two books about the industry, so I fully expected to be greeted with a wall of sound when the elevator doors opened onto the trading floor.

Instead, I was met with silence. Deathly, hushed, creepy silence.

It was Black Monday, 1987.

As he showed me around the trading floor, my friend tried to explain to me a little of what was going on and point out some of the various departments within Institutional Equities that were scattered about in different locations, but I must admit I paid more attention to the people and their behavior than his words. I could easily distinguish between the traders, who gaped at their terminals with the thousand-yard stare of shell-shocked infantry, and the salesmen, who were talking in hushed tones to clients over the phone. The latter sounded for all the world like crisis hotline personnel trying to talk a suicidal caller off a ledge. It wasn't pretty to listen to.

There was some sound on the floor, of course. The occasional ring of a phone, the occasional sob of despair (did I imagine that?), the occasional snort of disgust as the traders tried to read the tape, which was running about three hours behind the actual trading activity at that time. The only lively activity anywhere was in the pit, where in-house Nasdaq traders tried to reach their counterparts at other investment banks to execute or confirm trades. Since most of these counterparts were not answering their phones that morning, there was a lot of cursing and slamming of phone receivers to be seen there.

But probably the scariest part to me was the silent corner off the main floor where the risk arbitrageurs sat behind a Chinese Wall of soundproof glass. These few traders managed some of the largest true proprietary positions in equities at First Boston, and normally they cut themselves and their activity off from the main floor in order to prevent compliance breaches. That day, their glass door was open, and you could see the traders sitting silent and motionless at their desks, doing nothing but looking at the terminals before them. They sat straight and grim-faced, and their stillness was not the stillness of men who feel either confidence or serenity, nor was it the peacefulness of opportunity seen and realized. That little tableau frankly scared the pants off me, and I still see it clear as day more than 20 years later.

* * *

Today, the litany of woe seems to be neverending, and the causes for despair keep multiplying like rabbits.

I see as of this writing that the pathetic, naive little investors who pushed the market up this morning on the hopeful news that governments around the world were printing more money opening their pocketbooks to ...—do what exactly?—are giving up the ghost.

Goldman Sachs is back down around the lows of yesterday, where I pointed out the franchise-killing effects one can expect from that sort of stock price.

Morgan Stanley has decisively breached $17 per share as well, notwithstanding the desperate news that they might be selling themselves to fellow walking-wounded Wachovia or flogging a big stake to China Investment Corp. (By the way, who among you feels comfortable entrusting the long-term future of an important global counterparty to sovereign investors who hail from a culture where it passes as business as usual to spike baby milk with toxic melamine to hide protein deficiencies and then conceal the reason for recalling the milk for weeks because some fat ex-athlete in a spandex suit is pretending to fly up the side of a stadium to light a friggin' torch? I, for one, do not.)

Meanwhile, on the political front, we face a restive Congress and a couple of economically illiterate Presidential candidates, about whom the most charitable thing one can say is that they appear less foolish when they keep their mouths shut. Our standing President has decided to forgo his previously welcome silence and kick in his one and a half cents worth, which will no doubt frighten the market into another swoon once investors remember he remains the Decider in Chief for another four months.

On the M&A front, even the tumbleweeds are getting bored with inactivity, and any client who hasn't suffered sunstroke in the last three weeks is hunkered down in a fallout shelter behind sacks of rice and beans toting a loaded shotgun. A few of these will call me from time to time, to check whether it is safe again to come out and play, but they really don't expect me to say yes.

* * *

So where do we go from here?

I will venture out a brief distance onto an anonymous limb and make a few irresponsible predictions as to what might happen over the next several months. Let us hope I am proved wrong.

We have not seen true capitulation in the markets yet. When it comes, it will come in the form of one or more days with stocks declining closer to 10% a day than 5.

Volatility is going to the moon, with the result that a lot of short sellers are going to get slaughtered, too. There will be no safe haven in this storm.

Morgan Stanley: gone. Goldman Sachs: gone, or mortally wounded.

Timothy Geitner of the New York Fed: Interim Dictator of the United States, or dead in a ditch from a terrorist bomb thrown by someone who has finally figured out who actually runs this country.

Dick Fuld, John Thain, John Mack, and Hank Greenberg: strung up in Times Square with piano wire by rampaging mobs of disgruntled shareholders.

Having fun yet?

* * *

Normally, I am a firm believer in the maxim that it is unwise to yell "Fire!" in a crowded theater. Nevertheless, when the stage and proscenium are on fire, the orchestra is embroiled in a knife fight with the stagehands, and four of the six exits are blocked, I feel that prudence compels me to issue a measured warning to my fellow members of the audience:


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